Announcements Financial Institutions Rating Alerts

GCR affirms Ecobank Zimbabwe Limited’s national scale long term issuer rating of A+(ZW), Outlook Stable

Rating Action

Johannesburg, 05 July 2021 – GCR Ratings (“GCR”) has affirmed Ecobank Zimbabwe Limited’s national scale long term and short term issuer ratings of A+(ZW) and A1(ZW) respectively. The Outlook is Stable.

Rated Entity Rating class Rating scale Rating Outlook
Ecobank Zimbabwe Limited Long Term issuer National A+(ZW) Stable Outlook
Short Term issuer National A1(ZW)

Rating Rationale

The ratings of Ecobank Zimbabwe Limited (“Ecobank Zimbabwe”, “the bank”) reflect a good business profile, healthy capitalisation, an adequate risk position, and adequate funding and liquidity. The rating also factors in implicit group support provided by the parent company, Ecobank Transactional Incorporated (“ETI”, “the group”). The outlook is restrained by the hyperinflationary environment, adverse unquantified ramifications of the on-going COVID-19 pandemic and monetary policy inconsistency.

The bank has a sound competitive position in comparison to rated peers reflected by 1) dominance in trade finance/ structured finance, 2) increasing market shares in both loans and deposits, and 3) above average franchise strength. Furthermore, GCR positively notes Ecobank Zimbabwe’s classification as a domestic systemically important bank (“D-SIB”). The bank’s market shares grew over the last 12 months, attributable to its ability to leverage on the group’s structure and correspondent banking channels (an added advantage over peers) that enable it to offer letters of credit (“LCs”) and trade finance.

We consider the bank to be adequately capitalised, supported by a GCR capital ratio of 24% moderated for higher than industry average reliance on market sensitive income exposing the bank to revenue stability risk. Foreign exchange income contributed approximately 55% to operating revenues in May 2021 (FY20: 65%). Inflation negatively impacts the bank’s value preservation strategies. That said, the bank’s regulatory core capital was above the December 2021 requirement of USD30m using the prevailing interbank rate in May 2021 largely due to increase in foreign currency earnings. Given the nature of the business, we expect non-interest income, primarily foreign exchange, to contribute materially towards operating revenues. We also expect additional pressure on profitability considering constrained internal capital generation balancing the impact of hyperinflation on the net monetary asset balance sheet offset by growth in foreign currency income. Given the adverse operating conditions, reserve coverage was adequate.

The risk position is neutral to the ratings. The bank registered a non-performing loan ratio of 0.2% in April 2021 below the industry average. Nonetheless, cognisance is taken of the prevailing challenging operating environment, which poses vulnerability to Ecobank Zimbabwe’s asset quality despite adherence to stringent credit policies. The bank’s loan book is skewed towards corporates, with moderately high on-balance sheet concentration. However, this risk is mitigated by more than adequate reserve coverage. Furthermore, the bank had large off-balance sheet exposures in the form of guarantees and LCs which were 100% cash covered lowering credit risk. Resultantly, on and off-balance sheet top 20 concentration was a lower 14% in April 2021. Foreign exchange risk is moderate, in a local context, given the stability of the exchange rate and Ecobank Zimbabwe ran a currency net open position between 10% and 20% of the capital base in 1Q2021.

Funding and liquidity is a ratings positive reflecting high liquid asset coverage of the funding base. The funding structure is broadly comparable to top tier banks in Zimbabwe, with demand customer deposits (mostly corporate) comprising the bulk of funding and short-term maturity mismatches in its asset/liability profile. In April 2021, c.56% of deposits were in foreign currency and moderately high deposit concentration. Therefore, the bank remains susceptible to external shocks, further exacerbated by the challenging operating environment. Liquidity was good mitigating structural funding risks. While local currency liquidity is tight (due to stringent regulatory monitoring), foreign currency (“FX”) liquidity is appropriate evidenced by more than 1x FX liquid asset coverage. At 31 December 2020, the GCR liquid asset coverage of customer deposits was strong at 95%.

The ratings benefit from support and integration of the bank with its ultimate parent, Ecobank Transnational Incorporated, although not a material asset or revenue contributor. The bank is controlled by Ecobank Zimbabwe Holdings Limited (incorporated and domiciled in Zimbabwe), which owns 100% of the ordinary shares. Ecobank Zimbabwe Holdings Limited is a subsidiary of ETI.

Outlook Statement

The outlook is Stable, balancing our expectation that Ecobank Zimbabwe will maintain a sound financial profile supported by low asset quality risk, sound internal capital generation, defendable position in trade finance and adequate levels of liquidity against the turbulent operating environment.

Rating Triggers

National scale ratings reflect relativities to the local Zimbabwean peers only. Given the adverse operating environment there is implied volatility in the ratings. A positive or negative ratings movement could follow a change in capitalisation, asset quality or liquidity.

Analytical Contacts

Primary analyst Vimbai Muhwati Financial Institutions Analyst
Johannesburg, ZA VimbaiM@GCRratings.com +27 11 784 1771
     
Committee chair Corné Els Senior Financial Institutions Analyst
Johannesburg, ZA CorneE@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Financial Institutions, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, June 2021
GCR Financial Institutions Sector Risk Scores, June 2021
Jurisdictional Supplement for Criteria, July 2020

Ratings History

Ecobank Zimbabwe Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Long Term issuer Initial National BB+(ZW) Positive Outlook July 2005
Short Term issuer Initial National A3(ZW) July 2005
Long Term issuer Last National A+(ZW) Stable Outlook October 2020
Short Term issuer Last National A1(ZW) October 2020

Risk Score Summary

Rating Components & Factors Risk Scores
 
Operating environment 1.00
Country risk score 0.00
Sector risk score 1.00
   
Business profile 1.00
Competitive position 1.00
Management and governance 0.00
   
Financial profile 2.00
Capital and Leverage 1.00
Risk 0.00
Funding and Liquidity 1.00
   
Comparative profile 0.50
Group support 0.50
Government support 0.00
Peer analysis 0.00
   
Total Score 4.50

Glossary

Balance Sheet Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
Capital The sum of money that is invested to generate proceeds.
Cash Funds that can be readily spent or used to meet current obligations.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks
Income Money received, especially on a regular basis, for work or through investments.
Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price. 
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.

SALIENT POINTS OF ACCORDED RATING

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to Ecobank Zimbabwe Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

Ecobank Zimbabwe Limited participated in the rating process via video conference management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information received from Ecobank Zimbabwe Limited and other reliable third parties to accord the credit ratings included:

  • The audited financial results to 31 December 2020
  • Unaudited management accounts to May 2021
  • Breakdown of facilities
  • Banking sector information and Industry comparative data
  • Other related documents.
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